The authority initially opted to finance the defence costs of former chief superintendent David Duckenfield and former superintendent Bernard Murray, who have both retired. But the Merseyside-based Hillsborough Families Support Group challenged the decision, claiming it was illegal.
After hearing representations from both sides at a special meeting, the authority decided it did not have the power to fund the legal bill.
It has suspended paying the officers' costs, thought to run into hundreds of thousands of pounds. But the final decision is now likely to be heard in the High Court.
Authority spokesman Mike Sanderson said: "We have taken extensive legal advice on the matter and on balance our advisers have concluded the police authority does not have the powers to meet the costs of former police officers. We have felt obliged to support that view."
He added: "However, the issue is far from clear cut. We have heard from other legal advisers, including the Chief Constable's adviser, who are firmly of the view that police authorities do have that power.
"We have therefore co-operated with the Chief Constable's view that the true legal position should be determined by the High Court.
"The implications of this matter go beyond South Yorkshire and could effect the police service as a whole."
The former officers are accused of unlawful killing and wilful neglect of public duty arising from the 1989 disaster which claimed 97 lives.
Mr Duckenfield is also accused of intent to pervert the course of justice by lying about the circumstances in which a gate at the ground was opened on the fateful day at the Hillsborough ground in Sheffield.Reuse content